The Renaissance of the
Indian Ocean Economy

By Michael PowerStrategist, Investec Asset Management

The Indian Ocean has been a nexus of trade since the first Arab mariners sailed to uninhabited island of Mauritius. Following their footsteps came the Portuguese, the Dutch, the Chinese and the British seeking to trade new and exotic spices and raw materials in return for manufacturers.

The centuries-old tradition of vibrant trade both with and within the Indian Ocean helped spread the character of individual parts of the basin far and wide: Indonesia would not have become the world’s most populous Islamic nation without it. We also owe many of our favourite cuisines to the seasonal trade winds that ferried traders across the sea bringing with them rich spices from east and west.

Today, the Indian Ocean is bordered by a fast rising Asia to the north; to the west, an awakening Africa; to the east, the ever-lucky continent of Australia. Anchoring the apex of the Indian Ocean lies the Indian subcontinent whose seven nations today have a population of 1.7 billion and whose central giant, India, will by 2025 overtake China to become the world’s most populous nation.

I regard the Indian Ocean region as a whole as abundantly endowed with all the main factors of production starting with a population of just shy of 3 billion (including those land-locked nations whose primary port – be it a port in another country – borders the Indian Ocean). From West to East, it encompasses mineral-rich South Africa up to agricultural and people-rich Eastern Africa via oil-rich Arabia and Iran to the people-rich Indian subcontinent, onto people and resource-rich Myanmar, Thailand, Malaysia and Indonesia and down to resource-rich Australia.

And there is so much more: the region has capital that it can recycle through the banking entrepôts of Dubai, Singapore and even Port Louis and vibrant capital markets stretching from Johannesburg to Djakarta. It is also home to all three of the world’s “super-connector” airlines: Emirates, Etihad and Qatar Airways.

In short, the Indian Ocean Basin contains within it all the most important pieces of the modern economic jigsaw puzzle: all that is needed now is to assemble them. And the evidence is now building – strongly – that this is precisely what is happening.

A complex trading hub

One of the most interesting economic theories to emerge in recent years attempting to explain the mysteries of economic growth has been that of “Complexity” as put forward Harvard University’s research institute on this subject, the Observatory. Their latest Atlas of Economic Complexity unequivocally highlights the Indian Ocean Basin as being the hottest spot on the planet in terms of where economic growth is likely to be highest in the coming decade. Anchoring and leading this prediction – as its does the whole region – is India whose GDP growth is forecast to average 7.0% per annum in the decade to 2020. 10 of the 12 countries with the fastest GDP growth border the Indian Ocean or connect to it, namely Egypt, India, Kenya, Uganda, Malawi, Zimbabwe and Zambia; the immediately adjacent nations are Tanzania, Madagascar, and Pakistan.

Mozambique, Indonesia, Thailand and Jordan are also in the top 21. Confirmation of this prediction comes from an American corporate think tank, the Conference Board. They see the Indian Ocean basin as the region in the world likely to register the highest productivity growth in the next decade.

Many of the resource-rich countries of the region – South Africa, the countries of the Gulf Cooperation Council, Indonesia, Australia – may, in the wake of the boiling over of the commodity supercycle, feel cast into the shade. But I predict once resource-short India builds up a head of economic steam say by 2025, that their sun will shine again and that the commodity cycle will be revived. And these commodity-rich nations of the Indian Ocean basin will then be seated in the front row, ready to supply India with its imported raw and value-added material needs. There are signs even now that this “picking-up-where-China-left-off” phenomenon is starting to happen: in 2016, India is expected to overtake China to become the largest player in the market for sea-borne coal.

Invariably there is a clustering effect in this pattern of national development. Successful models are emulated and improved upon by neighbours; mistakes made by one often avoided by the next. Integrated infrastructure development programmes – such as the one that is much in evidence in Eastern Africa from Djibouti to Ethiopia – are designed to lift whole sub-regions together. Capital that grows comfortable with the risks of one country is often then more willing to pursue opportunities in its neighbours.

Growth spilling over

The economic renaissance of the Indian Ocean is a product of two overlapping factors. The first is that economic growth is spilling over from increasingly high-cost East Asia centred on China into lower cost South East Asia. The second is that manufacturers the world over are realising the last two great pools of underused low-cost labour reside in the Indian sub-continent and Africa: Bangladesh, Kenya and Ethiopia are already showing the benefits of this observation. Puma, Wal-Mart, JC Penny, H&M source some of their garments from Kenyan Export Processing Zones, which now employ over 66,000 people.

All over the Indian Ocean basin, there are muster points where industry is taking root: Gujarat in Western India, the island of Java in Indonesia and the Swahili Coast centred on Kenya. From these hubs, business is radiating out into adjacent areas; the recent rise of Rajasthan can partly be attributed to its adjacency to Gujarat.

This narrative dovetails neatly into China’s “One Belt, One Road” strategic vision. China is determined to rebuild the two Silk Roads of old: the terrestrial belt across central Asia and the maritime road via the Indian Ocean. And while the macro aim is to reinvigorate trade between the Far East and Europe, China wants to help central Asia become major markets for its exports as well as the source of raw materials. The implications for the Indian Ocean are profound: from building ports in Gwadar (Pakistan), Chittagong (Bangladesh), Bagamoyo (Tanzania), Lamu (Kenya), Hambantota (Sri Lanka), and Sittwe (Myanmar) to canals across the Kra Isthmus (Thailand) and then connecting railways and pipelines to these ports, such a strategy has been called – somewhat loosely – China’s Marshall Plan for the region.

For its part – having begun the 1990s with an inbuilt advantage that flows naturally from proximity – India has recently woken up to the region’s potential, and is busy rebooting its links to Africa, the Arabian Gulf and South East Asia.

Other littoral states have also increased their interests in Africa – Australian mining companies remain active in Africa as do private equity companies from Greater Arabia and a number of corporates from Malaysia. And how could one forget those pesky South Africans!

It helps that there are no global superpowers bordering the Indian Ocean as it creates an amphitheatre which allows the small- and the medium-sized players room to manoeuvre. Yes, the big Western players all have military facilities in the region, but this fact has created something of a vacuum for a rising China and a waking India to fill. India is of course the regional superpower in the making and has been linking up with the likes of Mauritius, the Seychelles, Madagascar and Iran. But notwithstanding this, the Indian Ocean is by far the most open of the big three ocean basins of the world – not just militarily but commercially too – much more so than the Atlantic or the Pacific.

Looking to the future

So what is my forecast for the Indian Ocean region?

The first prediction is that – anchored by the economic rise if India – the future will see a much bigger increase in both intraregional trade and with it intraregional investment.

That said, I expect China to seek to fill the Great Power vacuum in the region as much as it can, which ultimately will probably mean as much as India will let it.

I see the Indian Ocean Basin – together with Eastern Indonesia, Australia, New Zealand and the South Pacific Islands – becoming a major tourism destination for Asia – with its 4.3bn population. This is very good news for the island nations and littoral states of the Indian Ocean with their fresh air, clear skies, low noise pollution and tropical vegetation. Already China is the largest source of tourists for the Maldives and the third largest for Mauritius.

The shortlist for becoming the region’s entrepôt are Dubai in the west, Singapore in the east and, in the middle, Port Louis. Dubai will compete with Port Louis for Africa’s offshore business and, together with Singapore, for that of India. For the time being, it is clearly ahead of Port Louis in the Global Financial Centre Index – sixteenth versus sixty-fourth – with Singapore at fourth.

With the added advantage of being English-speaking in a basin that understands English, I see Indian companies spreading themselves aggressively throughout the region. Hero, Bajaj and TVS have already done this in the motorcycle and scooter sectors. Indian IT firms like Tata, Infosys and Wipro and pharmaceutical companies like Cipla, Ranbaxy and Dr Reddy are already increasing their footprints as are the hotel groups like Taj and Oberoi.

Over the past 50 years, the Indian Ocean basin has changed dramatically and particularly during the past decade. Central to these changes has been the economic rise of Asia, an event with truly global consequences in that it is shifting the centre of global economic gravity back to where it was prior to 1800 and to where population density would dictate it should be: Asia.

Notwithstanding the abrupt end of the 2000-2012 commodity supercycle, Asia’s rise has given Australasia a new lease on life and allowed Africa to establish its economic relevance. The centrifugal forces that Asia’s rise have unleashed will likely have their greatest impact on the nations surrounding – and in! – the Indian Ocean mainly because the centripetal forces pulling this region in other directions are far weaker than they would be in Asia’s other great ocean border, the Pacific. There are a number of other reasons working in the Indian Ocean basin’s favour: above all, it has the best demographics, the most competitively priced labour and so the best productivity growth prospects in the world.